428_review_09

428_review_09 - 428 Valuation Final Review Summary Market...

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428 Valuation Final Review
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Summary Market Efficiency Valuation 1. Models DDM, DCM, RIM 2. Forecasts Earnings, Multiples, Growth, Pro Forma 3. Assessments Sentiment, EM Risk in Value strategy and Option
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Rational EMH: Prices are always right (price = value) • Investors are rational • Arbitrageurs correct mispricing Behavioral Finance: • Prices are sometimes wrong • This is often due to investor irrationality – people make systematic errors • There is limit to arbitrage Market Efficiency: P = V ? P= market Value according V= NPV of future cash flows
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Three Forms Of Market Efficiency Weak Form P Historical information Implications Evidences   Semi-strong Form P Historical + Current information (All public) Implications Evidences     Strong Form P Historical + Current + Inside information (All public and private) Implications Evidences  
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Arbitrage P(security) = V(All CF paid by the security) Key force to bring market to be efficient Economic theory behind arbitrage Limits to Arbitrage Siamese Twins Equity Carve-outs Other evidence Feasibility Implications Behavioral finance explain Noise trader risk
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Short Sale What is short sales? Mechanics of short sales Stock loan transaction collateral requirements Rebate fees Lender’s rights Risk Benefits of shore sales Benefits of shore sales
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Research Findings on Short Sale Large short interest is bad news for a firm’s future returns (incremental to 3-factor model) Heavily shorted stocks look like late-stage glamour stocks (high V/P ratios, high turnover) But profitability of this strategy is mainly from heavily shorted stocks with high volume and volatility
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Valuation: Model 1 DDM: T E T T t t t E TV d P ρ + = = - 1 0 g d P TV E T T T - = = + 1 G ρ = 1+r , G= 1+g 3 1 2 0 2 3 ..... T T T T E E E E E d d d d TV P = + + + + +
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Valuation: Model 2 DCF: The value of a firm is equivalent to the value of debt plus the value of equity, as follows: V 0 F = V 0 E + V 0 D where: V 0 F = the PV of CF generated by the firm V 0 E = the PV of CF generated by equity securities V 0 D = the PV of CF generated by debt securities G FCF CV F T T - = + ρ 1 T T t t t F CV FCF V E + = = 1 0 Where FCF=C-I, ρ = 1+ WACC, G= 1+g
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DCF Valuation: NY State Electric and Gas ___________________________________________________________________________ New York State Electric and Gas Corp. (Amounts in millions of dollars except per share data) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Cash from operations 602 460 381 403 379 499 533 531 534 Cash investments 207 191 211 301 243 302 216 160 212 Free cash flow 395 269 170 102 136 197 317 371 322 Discount factor (1.09) t 1.090 1.188 1.295 1.412 1.539 1.677 1.828 1.993 PV of cash flows 362 226 131 72 88 117 173 186 Total PV of cash flows 1,355 Continuing value 1 3,578 PV of CV 1,795 Value of the firm (V F 87 ) 3,150 Book value of debt and preferred stock 2,290 Value of equity (V E 87 ) 860 Value per share (55.733
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell.

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428_review_09 - 428 Valuation Final Review Summary Market...

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